Montgomery Ward & Co., Inc. v. Pacific Indemnity Company
557 F.2d 51
3rd Cir.
1977
Check Treatment

*3 in products liability diversity action which DUSEN, Before VAN and GIBBONS pending was then in the United Dis- States GARTH, Judges. Circuit trict Court for the District of Western Pennsylvania. Montgomery was named as OF THE OPINION COURT “a person insured” on the “vendors endorse- DUSEN, VAN Circuit Judge. ment” to the had policy Pacific issued to appeal This Industries, is from an attor- Royal award of the manufacturer and also ney’s fees incurred as a bringing result of in defendant the tort action.3 jurisdiction 1. This court has under 28 U.S.C. “I. INJURY COVERAGE A—BODILY LIA- court, § 1291. Both here and in the district BILITY Pacific that contended the case should dis- DAMAGE LI- COVERAGE B—PROPERTY $10,000. missed because less than inwas con- ABILITY troversy. reveals, As the factual outline below company pay will on behalf of the Montgomery potential liability Ward’s at the insured all sums the insured shall be- substantially time suit was in ex- legally pay obligated damages come jurisdictional cess of the amount and all of the because claims declaratory judgment asserted in the bodily injury A. or substantially action were interrelated. The fact property damage B. subsequent settlement, below, of the described applies, to occurrence, caused insurance Montgomery’s and the liquidated reduction to a claim herein, and as defined the com- $10,000. amount below not did de- duty pany shall and have the to defend prive the district court of its 28 U.S.C. any against seeking damages suit the insured 1332(a) jurisdiction. Gray See v. Occidental bodily injury property on account such or Company California, Life Insurance 387 F.2d damage, any allegations even if 1968); (3d Indemnity Cir. Globe Co. v. groundless, fraudulent, Co., suit false St. Paul Fire & Marine Insurance (3d 1966); investigation make such Cir. Moore’s Federal Practice settlement [3], (2d 1975); any expedient ¶¶10.91 ed. Moore’s claim or 0.92[1] 6A suit as deems Federal Practice 57.23. ¶ following The endorsement contained ex- explicitly approved 2. We procedure such a clusion: Indemnity Company Globe v. St. Paul Fire & respect “The insurance with to the vendor Marine Insurance 369 F.2d 102 not does to: 1966). Any (a) express warranty, distribu- pertinent pro- purpose, 3. Another or sale for section of the contract tion unauthorized insured; vided: the named products liability case to that defending prayers sought included The relief Pacific did re- litigation.5 point judg- declaratory court enter the district Montgomery for the fees incurred imburse pertinent provisions construing ment declaratory judgment ac- bringing Endorsement issued Insurance the Vendor to prosecute continued Montgomery tion. Montgomery as designating Pacific and solely to recover the at- present action insured, respective named determine bringing the de- torneys’ expended under Montgomery Pacific and liabilities of The district claratory judgment action. endorsement, Montgom- determine had a to de- duty found that Pacific coverage under should be afforded ery provisions Montgomery fend inju- personal regard endorsement obduracy contract and that Pacific’s pending Montgomery action ry refusing Montgomery to either defend Montgomery same and order obligations be- acknowledge contractual counsel fees private to its be entitled in good settlement was not taken faith fore *4 injury as personal the action expenses in because the refusal was made without rea- declaratory judgment action. the well opinion cause.6 The district court’s sonable 1975, liability 24, products the June On acknowledged Pennsylvania's adherence to $50,000. of paid Rule, was settled.4 Pacific claim which disfavors the al- the American the Montgomery attorneys’ and reimbursed fees in absence of settlement lowance obligation,7 or contractual but incurred and counsel’s fees its costs $50,000.00 $15,000.00 damage arising injury property ‘The with a (b) Bodily limits are or $150,000.00 aggregate. of: out deductible and Infor- Any changes (i) vendor which act being as to mation is obtained the amount Products; of the condition paid policy during previously out under this product (ii) Any maintain the failure to policy period and defendant reserves the condition; merchantable (iii) Any supplemental file a answer when said to inspection, ad- failure to make such is obtained.’ information justments, servicing vendor tests or as the plaintiffs interrogato- Pacific did not answer agreed normally has to or undertakes make ry obligation indemnify on its to defend and business, in course of to make in usual Montgomery but stated that the infor- Ward or with the distribution sale connection necessary interrogatory to answer the mation products, or being sought supplied be ‘in was would (iv) sale which after distribution or Products the near future.’ the named insured have been labeled sup- promised to “The information Pacific container, part in- as a relabeled gredient used Only ply provided. the case never when was thing or substance other was did it become clear that there no settled $15,000.00 or for the vendor.” provision policy any investigation and no deductible Pacific failed to conduct $150,000.00. policy applied been ascertain if the or to There never had exclusions limit of explain investigating or- procrastination. its reasons for not valid reason for expeditiously coverage issue. der resolve the “Meanwhile, Montgomery Ward was See note below. to defend itself and contin- forced to continue interrogatories ued answer Pacific’s con- products liability originally 4. The suit was 27, expenses by saying 1974; cerning the of its amount on March the date of 31, July accident 1972. An affidavit in the was to estimate the eventual it was unable Montgomery expenses record indicates that demanded of the Reed incurred defense provide that Pacific for it at least as defense verdict). (or the amount of a Pacific action 28, early as June 1974. and contin- continued defend Hutchinson say obligated it was to defend ued to paid the remainder 5. Other insurance carriers subject Montgomery Ward exclusions $125,000. of the settlement. already set forth." limits portion delay Montgomery Indemnity A of Pacific’s was attributable 6. Ward & Co. v. Pacific 18, Pacific’s assertion in answer to one of Mont- (W.D.Pa., Opinion of June Civil interrogatories gomery’s aggregate to- that the 74-1161), slip opinion (emphasis No. 4-6 of liability might on have been tal See, g., Torts, supplied). e. Restatement of being possibility exceeded and that investigated. this was pp. 12-13 & below. opinion The indi- trial court’s leading authority analysis A offers this circumstances of this assertion: cates the legal principles applicable case: interrogatory response plaintiffs “In con- recovery. limits, responded: cerning Rule of no Pacific “General (1975). Thus, we agree went on to conclude that the state law in while with 308] inapplicable where bad this area would Pennsylvania defendant law of The court faith was found. stated: normally preclude award of fees, Corp. “The to award such v. Ameri- power see Arcos ordinarily are not included in the costs is Liability can Mutual Ins. F.Supp. Co. [350 part equity jurisdiction of the historical (E.D.Pa.), opinion, aff’d without courts. Vaughn [Vaughan] the federal 1973)], inap- F.2d 678 the rule is Atkinson, supra, at 530 U.S. [527] if plicable defendant’s refusal defend 88], Therefore, 8 L.Ed.2d S.Ct. [82 bad was in faith.” or its is found equivalent bad faith The did not consider whether exist, the court courts would a “bad of state law irrespective since exception faith” to the American Rule un- powers equitable court’s transcend der the circumstances of this case. law circum- applicable state under those Sprague stances. v. Ticonic National See II. Bank, S.Ct. [59 Cole, Hall (1939); L.Ed. U.S. 1184] A. Alyeska Actions Diversity S.Ct. L.Ed.2d 702] [93 question of attorneys’ gen- notwithstanding And this is true fees, recently considered the Su- normally eral rule that state law will preme in Alyeska Pipeline Court Service Co. award of fees in govern Society, v. Wilderness Technicolor, Toland v. diversity cases. *5 1612,

Inc., 1045, (1975). 44 L.Ed.2d 141 After (10th 1972); pointing 467 1047 F.2d Co., Inc., Culbertson v. Jno. McCall Coal out the limited situations in which attor- 1403, (4th Cir.), neys’ 1406 cert. den. fees be in federal ques- awarded 1033, 516, cases, 419 S.Ct. 42 L.Ed.2d U.S. tion the Court noted: [95 throughout “It has been consistent rule nized distinction between costs and allow- litigant the United States that a no inher- has attorneys’ for ances fees.” right paid attorneys’ by ent have his fees (footnotes alia, citing, omitted), Id. inter § 12.5 opponent opponents. or his item is Such an Distilling Corp. Brewing Fleischmann Maier v. ordinary not recoverable in the as dam- case 714, 1404, Co., U.S. 386 87 18 L.Ed.2d S.Ct. 475 costs, ages, nor as and hence is held not (1967); Commonwealth ex rel. Scherer v. provision allowable in the absence of some Scherer, Pa.Super. 166, 182 126 A.2d 483 for its court, either in or allowance a statute rule of (1956). provision stipu- or some contractual or frequent practical of the most “One sweeping general lation. This applied rule has been applications exception the allows legions preclude in of cases to recov- attorneys’ litiga- in fees incurred fees, ery attorneys’ by plain- whether the resulting tion contract, from defendant’s breach of defendant, by opponent tiff or the from one’s damages, notwithstanding the in a civil action.” general attorneys’ rule that fees not re- Attorneys’ Speiser, (1973) (here- S. Fees 12.3 § damages, coverable as rule (footnotes omitted), is the that an “Speiser”) citing, inafter alia, wrongfully Kling, 118, who insurer refuses to defend an inter (1969). Re 433 Pa. A.2d 552 insured, brought against claiming action general denying by “The American one policy, rule that the action is not covered right attorneys’ recover from fees his attorneys’ will be liable for the reasonable opponent opponents consistently has been maintaining fees incurred in insured Spates throughout applied the United in ac- his own defense. claims, tions at law on contract ... practical being rather illustration . . . wrongfully “Where the insurer has refused incurring successfully of fees one defend, may only it become liable not for maintaining policy action on an an insurance attorneys’ fees in the one action which the contract.” sued, insured but for all other ac- fees alia, (footnotes omitted), citing, Id. 12.4 inter § involving tions a result insured as of its Balint, 262, Corace v. 418 Pa. 210 A.2d 882 breach.” (1965). (footnotes citing, alia, omitted), Id. 13.8 inter “The term ‘costs’ does not embrace ‘coun- fees,’ is, Springfield Township Indemnity particularly v. sel and there Insurance States, 461, long recog- Co., (1949). United a well-known and Pa. 64 A.2d 761 People Sioux federal courts.’ situation very A different “31. Surety court sits in County National when a federal presented ordinary diversity case. an diversity 239, 243, 241, 72 L.Ed. 547 ‘[I]n S.Ct. law does run case the state (1928). The on the awards of limitations or rule federal statute counter to valid deriving attorneys’ by federal courts fees not, state law usually it will not to bar the 1853 Act were found from attorney’s fees right denying Id., at 243-244, at the award. S.Ct. thereto, reflects a giving a Erie nothing requiring We see after state, be should substantial from this result. See Hanna departure Moore, Practice Federal followed.’ J. Plumer, 467-468, U.S. 1974) ed. 54.77[2], pp. ¶ 1712-1713 1136, 1141-1142, L.Ed.2d Speis- (footnotes omitted). See also S. clearly juridi- The same would hold for 14:3; (1973) er, 14:4 Attorneys’ Fees §§ rule, although question cally created Annotation, Pre- (hereinafter Speiser); govern in proper awarding rule to to Recover Counsel vailing Party’s Right in federal cases diversity Courts, 8 L.Ed.2d in Federal Fees of state autho- in the absence R. Erie to the decision 900-901. Prior signifi- practical rization loses much Tompkins, Co. v. 58 S.Ct. light the fact that most cance States held that (1938), 82 L.Ed. 1188 Court American rule. follow restrictive See an award of requiring a state statute 12:3; 1 Speiser in a 12:4.’’ case applied §§ should state courts removed Id. at (empha- note 95 S.Ct. at 1622 courts: is clear that is the ‘[I]t supplied). sis plaintiffs to allow policy of state meaning wording plain cases, attorney’s fee in certain recover quoted concerning is that state rules effective and it has made applied award of fees are to be fee making allowance manda- diversity provide cases whether these rules tory on its courts in those cases. It it, deny provided such rules an award or if this policy would be least anomalous do not run counter to federal statutes *6 plainly could be thwarted and the so Tryforos v. Ica- given destroyed removal of cause considerations.8 See by decision, put Alyeska it one side the considerations Prior to time of “We power arguable to award disposing questions was that the attor in of relevant that arise neys’ when obdurate conduct was involved adjudicating is a federal court a claim when equity inherent was a matter committed [Citing on a law. Our based federal cases.] though of a even fed discretion problem only rights transactions for which touches jurisdiction only eral diversity jurisdiction. existed as a matter of by obligations one of and are created See, g., Speiser, note e. States, which, for the of in and assertion 7, 12.11, 13.3, supra, Apparently, the 14.3. §§ citizenship parties, diversity of of court case of support Vaughan theory major in v. found Congress has made federal another 527, 997, Atkinson, 82 8 369 U.S. S.Ct. L.Ed.2d forum. available (1962) (attorneys’ fees in 88 prosecuting allowed seaman starting point of must be the “Our wrongfully pay suit for withheld jurisdiction Erie R. v. Co. federal cure), Dodge for maintenance and and v. ments 64, 817, 451, 728, Tompkins, Tulleys, 58 S.Ct. 82 L.Ed. 144U.S. 12 36 L.Ed. 501 S.Ct. (1892) (attorneys’ on deed sion diversity fees allowed suit 1188 embodies.” upon provision in deed 99, 101, trust based York, Guaranty U.S. Trust Co. 1464, allowing though provi for fees even such (1945). S.Ct. L.Ed. law). under state Vau was ineffective exercising jurisdiction “In their on the question ghan Tulieys involved a federal and diversity citizenship, ground of of federal the rationale seems to have been imbued with of 865], courts, history, long in the course of their Tyson, U.S. 16 Pet. L.Ed. Swift [41 regard for not in their have differentiated which, course, thoroughly rejected of was law and suits State law between actions at Tulieys Significantly in Alyeska. cited Erie. equity.” clear, Alyeska As the Vau mákes 103, 65 at 1467. Id. at S.Ct. involving ghan is fed rationale limited cases good beginning has been a “From there diversity suits, questions; Erie’s eral teach equity talk cases of ings govern deal apply is, system. proper- separate legal And so it fees. A., Development Company, rian framed inquiry S. in terms of ‘substan- denied, (7th 1975), cert. tial’ variations between state and federal litigation. U.S., L.Ed.2d 65 S.Ct. at 1469. Not only nonsubstantial, trivial, variations not likely to raise the “. . . choices between state and fed- sort of equal protection problems which by applica- eral law are to be made not Erie; troubled the they Court are also any paper’ tion of automatic ‘litmus crite- unlikely to influence the choice of a rion, fo- by poli- but rather reference rum. The ‘outcome-determination’ test cies the Erie rule. . underlying therefore cannot be read without refer- “The Erie rule is rooted in part in a ence to the twin aims of the Erie rule: realization that it would be unfair for the discouragement forum-shopping character or result of a litigation materi- avoidance inequitable administration to differ ally because the suit had been of the laws.9 in a federal court. “9 progeny . . . Erie and its make clear sitting diversity that when a federal court in a question case is faced with a of whether or not part “The decision was also in a reaction law, importance state of a state practice of ‘forum-shopping’ which relevant, only rule indeed but in the context grown up response had to the rule of asking application whether of the rule important would make so a difference to the 73-74, Tyson, Swift v. 304 U.S. at 58 S.Ct. litigation character or result of the that failure at 819-820. That the York test was an unfairly enforce discriminate attempt to effectuate these policies is State, citizens of the forum or whether by demonstrated the fact that the opinion application impor- of the rule would have so ly equity understood. The suits in of which able as an alternative tribunal to the State’s ‘cognizance’ Contrariwise, the federal courts have had ever may courts. a federal court body since equitable remedy 1789 constituted the of law which afford an substantive transplanted country had been right recognized by to this though a State even English Chancery. sys- Court of But give State court cannot it. Whatever contra- equity doctrines, tem of ‘derived its produced by as well diction or confusion powers, giving medley as its judicial from its mode of phrases relief. severed from their Langdell, Summary Equity Pleading (1877) environment, body adjudications con- giving ‘cognizance’ cerning xxvii. In equitable diversity federal courts relief in cases equity diversity jurisdic- suits in cases of leaves no doubt that the federal courts en- tion, Congress gave, never rights nor did the federal forced State-created substantive if the power deny proceeding remedy courts ever claim the substan- mode of were conso- rights body equitable tive created State law or to create nant with the traditional rights remedies, practice procedure, substantive denied State law. and in so equita- doing they enforcing rights “This does not mean that whatever were created remedy arising ble is available in a State court must the States and not inherent diversity be available in a suit in a federal federal law.” *7 court, conversely, may 105-107, (footnotes a that federal court Id. at 65 at 1468 S.Ct. omit- remedy equitable ted). not afford an not available Equitable in a State dealing right court. relief in a federal “Here we are with a to recov- subject court is of course to restrictions: the er derived not from the United States but scope When, suit must be within the traditional of from one of the States. plaintiff happens because the equity historically English non-resident, as evolved in the to be a such a Chancery [citing cases]; plain, right Court of adequate a is enforceable in a federal as well as in remedy complete court, at law must a State the forms and mode of enforc- ; wanting, explicit Congressional times, ing right be . . may naturally . enough, the at equity powers vary curtailment of judicial systems must be re- because the two are not ; spected, right . . . the adjudicat- constitutional identic. But a since federal court by jury evaded, [citing ing solely trial right cannot be a State-created case]. because of may give diversity That a citizenship parties State authorize its courts to of is for equitable unhampered any purpose, effect, only relief or all that another court of State, such restrictions cannot remove these fetters the right it cannot afford if the [Citing the federal courts. is made cases.] recover unavailable the substantially State law cannot define the remedies which a State nor can it affect the en- give simply right given by federal court must because a forcement of the as the State.” diversity jurisdiction 108-109, federal court in is avail- Id. at at S.Ct. 1469-1470. or both upon fortunes of one effect the tant an of be federal Hanna, a federal of shaping such the would litigants to enforce it failure the that right is state substantive unwarranted.9 plaintiff the likely choose a to cause court.” that fo This does not mean the federal a for the obdu rums are become haven 460, 467-68 & Plumer, U.S. Hanna v. first, may rate and the vexatious: 8. The 14 L.Ed.2d note 85 S.Ct. officers signifi- attorneys, is that the as of expected to Hanna citation Court’s Alyeska court, considerations to the rightful the same the will adhere bound because cant Hanna and second, foundation of advocacy; formed the zealous the Fed aries of ap- would following Erie line of cases the sanc provide eral Rules Civil Procedure a federal court were necessity, ply, expenses, in the tions form reasonable fees engraft federal notions fees, including reasonable tried rights onto state substantive awards offending party, an may be assessed that It diversity apparent action. in a Moore’s, 1715; third, at the supra, see fees in a an award permitting case, may the district court con extreme iden- them for an denying court but federal apply clude state courts would ex state court would in a tical action ception the American Rule to award at the significant a reason to choose represent torneys’ remedy fees failure to because we assume that this forum. Even if federal or bad faith would under obdurate conduct cases in- restricted to difference could be major or substantive mine a area of state faith, it is or bad volving obdurate conduct law. of such an award possibility clear cases color the substantive many would B. Law11 State significantly and could aspects case general matter that It clear as legal presented by alter theories appli- Erie adhere to a close as claim or defense. Under courts parties course, suggestion, Alyeska 10. This last assumes that citation to Sioux 9. As Court’s ques- indicates, awarding County the state courts have not considered at- a state statute effectuating those in torneys’ may tion under circumstances similar to instant be a means of has considered creating case. When state major policies as of the state well as question, apply determi- would the state we right in its own terms. Identical substantive policy grant withhold award as a nation right no considerations See, g., e. matter of stare decisis under Erie. Blum v. William and, quotations recover exists Theatres, Inc., Goldman indicate, note above we not create (3d 1947). F.2d Cir. equi- even as a matter of the substantive power does table where the state parties did 11. Because the not raise con- give it. flict of laws issue district court do opinion “We reminded the Erie appeal, applicable not raise it on under law of conflict can, Congress neither nor the courts federal (Penn- principles of laws sylvania) the forum guise formulating deci- rules of govern the substantive issues courts, rules which sion fashion justifying appli- of facts due cation of the law of some other absence supported by grant are not thority of federal au- jurisdiction. other contained in Article I or some Klaxon Manufactur- See Co. v. Stentor Electric Constitution; section in such areas ing 85 L.Ed. S.Ct. govern law can be state must because there that, Parkway We note unlike no other law.” Baking Baking Compa- Company v. Freihofer Hanna, 471-72, supra, at 1144. See 1958), ny, no conflict Cir. Carlson, Prudential Insurance Co. also appeal raised on in this of laws issue was Montgomery, case. (10th 1942). (In diversity F.2d 607 suit parties Royal, Pacific and *8 policy, brought Jersey in a on New accident contract, incorporated in Illi- the insurance Kansas, Jersey federal court in the sub- New nois, respectively. California and Kansas Had applied, including law stantive the New Pennsylva- conflicts been raised under issue Jersey attorneys’ rule fees were theories, appear conflict it would nia that the of laws recoverable, provid- not ing a Kansas and statute applied the insur- would have attorneys’ for the fees as costs juris- of of the ance law one of abovementioned against companies appear in suits insurance was held It three of dictions. would that all the inapplicable, foregoing jurisdictions it created a substantive since allow an award would attorneys’ right.) under the fees circumstances

59 Rule, later action on the contract of pre- cation American insurance attorneys’ who against wrongfully the award of fees. For the insurer refused cludes instance, Balint, 262, in 418 See, g., Corace v. Pa. defend the earlier action. e. (1965), Pennsylvania Casualty A.2d 882 Su- Cadwallader v. New Amsterdam 210 Co., 582, (1959). Court an award of attor- 396 Pa. 152 A.2d 484 In vacated preme addition, repeated Pennsylvania statement Supreme fees with its oft neys’ Court permitted imposition has attorneys’ that: “ '* * * offending party fees on the as a part of again over we have Over and imposed contempt proceedings fine in civil no recovery there can for decided where contumacious obdurate conduct party fees from the adverse to a counsel has been See Bata involved. v. Central- cause, express absence * * * Penn National Bank 448 Philadelphia, ’, allowance same Smith 355, 13, 343, Pa. 372 293 & n. A.2d & 352-53 Co., 413, 417, 215 Pa. Equitable v. Trust (1972); Brocker, n. 13 v. Brocker Pa. 429 591, A. or clear (1906), agreement 64 592 513, 520, 336, (1968); 241 A.2d 339 Lichten- parties, Fidelity-Philadelphia Lichtenstein, 682, (3d stein v. 481 F.2d 684 Philadelphia Trust Company Transpor 1973).12 Cir. 541, 548, Pa. tation 173 Company, 109, 113 some (1961), A.2d other estab We are aware of no Pennsylvania Hempstead v. exception, lished see Mead case which has be applied “obdurate School, 493, Theological ville 286 Pa. havior” exception or “bad faith” gen 103, (1926).”

A. A.L.R. 1145 eral American concerning Rule the award 271-72, at at 887. Although declaratory Id. A.2d it fees judgment in of attorneys’ However, that an action appears involving contract. Bata would not lie in in a suit and at Pennsylvania suggests, by analogy, Brocker least ordinary specific per- Pennsylvania breach of contract or if the Supreme Court Balint, contract, of a see were to supra question they formance at consider the 273, may A.2d at an insured recov- “obdurate behavior” exception in expended defending consistently er with broad outlines reiter negligence Balint, initial action him in a ated in supra.13 See, g., Apparently, Pennsylvania Corp. this case. e. Diamond Shamrock courts have 13. Co., Casualty Lumbermens cojoining Mutual not considered a case the elements (7th 1972)(discussing Cir. Ill.Rev.Stat. a breach of an insurance contract with bad 767); Speiser, ch. § discussion note Cadwallader, faith and obdurate conduct. su- 13.41, 13.4, 13.8, supra, 13.43 and §§ cases pra, Bata, Brocker, supra, supra, allowed However, therein. cited absence of stat- only party prevailing those fees to the ute, foreign rights law thereunder to be Cf., present. one of those elements was three fact, given proved effect like must be other also, Reed, (1865) (coun- Barnett v. Pa. 190 absence of which the law of the forum is sel fees allowed in tort action for malicious ordinarily applied. See 15A C.J.S. Conflict of process). abuse declaratory None of these cases was 3(9), Pennsylvania Laws cases cited action, judgment however. On therein; Klaxon Co. v. Stentor Electric Manu- hand, other both Bata Brocker illustrate facturing public policy strong that when exists for a L.Ed. party duty perform imposed by law and it quoting approval following After with performed is not because obdurate behavior court, Judge statement of law Aldisert, faith, Pennsylvania or bad courts will not speaking for this stated in foot- impose appropri- hesitate to fees in note 1 at 481 that “our F.2d at 684 research private right ate insure the circumstances to no discloses difference between law of [the vindicated and an additional incentive to Pennsylvania and in this law] area”: protect public aspects of the action. losing party “. . . where a has counterpart case, This has in this its since faith, an action or raised a defense bad that, long has been the law vexatiously, wantonly oppressive or for rea- special the absence of circumstances such as sons an award of counsel fees to the other fraud, duty actual has a its an insurer to defend party appropriate.” only insured and peril. refuse to do so Lichtenstein, Lichtenstein v. F.2d 1973). *9 compa- claims in which the tlements of Also, if Pennsylvania even become policy under the has ny’s liability exception to generally the bad faith adopt clear. reasonably Rule, reason to ex- there is American courts would pect Pennsylvania that fees in the allow of recovery a provide Failing promptly to “(xiv) a matter of this case as circumstances of in the of basis explanation reasonable insurers public prevent in order to policy or to the facts in relation policy insurance rights contractual of frustrating for for of claim or applicable law denial bring to forcing the insureds the insured settlement.” compromise the offer of action when the judgment a declaratory of to for a goes provide system The Act on was and in refusal to unreasonable defend and investigate to violations administration bad faith. of responsibility authority within broad im- State Insurance Commissioner Unfair Insurance Pennsylvania Thus, it is clear that obdu- pose civil fines. 1171.1, et Act, seq., 40 P.S. Practices §§ part and on the of rate behavior bad faith 1171.5(10)i-viand xiv: in 40 P.S.

provides to defend an insured refusing insurer in acts if following com- “(10) Any of of state contrary explicit expressions frequency such mitted or with performed as policy expressions law and found practice shall as to indicate a business legislature.14 Pennsylvania courts and settlement or constitute unfair claim in this presented Under facts compromise practices: case, Pennsylvania required law Pacific “(i) Misrepresenting pertinent facts provisions of Montgomery defend provisions relating to policy or contract Mont Royal the contract with under which coverages at issue. was an additional insured. Since gomery acknowledge act “(ii) Failing to and prima had established facie Montgomery written or oral communi- promptly upon coverage, obliged ease Pacific was of un- respect arising cations with to claims “even if such suit was Montgomery defend policies. der insurance to make groundless, false fraudulent” or “(iii) implement Failing adopt and investigation es prompt thorough in- prompt reasonable standards for limita tablish that other insurance vestigation arising claims under insur- of exceptions tions or would have insulated policies. ance it did neither. The liability; from ultimate “(iv) Refusing to claims without pay had a district court found that Pacific never conducting investigation a reasonable valid for its procrastination reason upon good based all available information. its was not in These obduracy faith. supported of fact are well findings “(v) Failing deny coverage to affirm or disagree Pacific’s final record. We with of time after claims within reasonable re contention that material issues of fact have been proof of loss statements com- summary judgment main make im pleted company and communicated to proper. or its representative. stated, “(vi) good judgment faith to For reasons attempting Not court will prompt, equitable effectuate fair and set- be affirmed. We, litiga- course, solely prior do not hold that commencement of the section provide pre-liti- laws for here insurance tion. The vexatious conduct was gation prod- in this We case. insofar as the refusal to defend the merely expression concerned, liability cite them here for their ucts claim is as well public policy step as a in our conclusion post-litigation de- refusal the continued that in state courts consideration (when fend the instant action from 12/5/74 would have allowed an started) prod- (the date of the to 6/24/75 in the circumstances this case. liability settlement), was followed ucts acknowledgment subsequent by Pacific this is not a case such as We note duty Vaisman, liability claim and its Straub v. F.2d 1976), place such claim. conduct took defend where the vexatious *10 concurring: GIBBONS, Judge, Circuit I judgment because

I in the court’s join the same wheth- would be the result

believe federal law a applied

er we by Judge Van prediction made

rule. follow Pennsylvania would

Dusen that Atkinson, 82 S.Ct. v.

Vaughan (1962), and allow L.Ed.2d 88 award fees, convincing. I do however, that a state which

agree, Atkinson, v. Vaughan

not follow awarding precluded would be

forum to a vexa- fees for what amounts regard I process. abuse of its

tious authority fees on nature as more

Vaughan Atkinson than are such awards under

of costs rule. exceptions to the American

other the notions of federalism

Certainly require that a the Erie rule do not

underlie public accept

federal forum on a happens sit state costs abuse

matter such as the award of Byrd Ridge v. Blue Co- process.

of its Cf. 893, 2 525, 78

operative, not, of The issue need

L.Ed.2d

course, be here. resolved Holyland ABDALLAH d/b/a

Mohammed

Store, Appellant, AGENCY. SECURITY

CARIBBEAN 77-1028.

No. Appeals, Court of States

United Circuit.

Third 28, 1977. April

Argued 10, 1977. June

Decided